Income tax exemptions for salaried employees refer to specific financial benefits that allow an employee to reduce their taxable income. These exemptions are designed to promote economic growth, incentivise savings, and support specific sectors. There are several tax exemptions available under the Income Tax Act of 1961, which may change as per the government rules. Therefore, in this article, we will discuss the income tax exemptions available for a salaried individual.
Income Tax Exemption in India is the benefit that allows individuals and businesses to reduce their taxable income. This results in lower or no tax liability for certain income sources as per the income tax regime and regulations set by the Government of India.
It must be noted that tax deductions and exemptions are available with the old tax regime. But, you can avail of a few tax deductions under the new tax regime for FY 2023-23 (AY 2024-25). You should decide the income tax regime while filing your Income Tax Returns (ITR) after making a comparison between the Old vs. New Tax Regime.
Common income tax exemptions in India include deductions for investing in tax-saving instruments such as follows:
Standard Deduction under New and Old Tax Regime
Allowances Exempted as per Income Tax Act Section 10
Income Tax Exemption on Housing Loan
Various Sections for Income Tax Exemption under the IT Act, 1961
Deductions Mentioned below Chapter VIA of the Income Tax Act
It is important to stay updated with the latest income tax rules and regulations, as they may change over time.
In the financial year 2022-23, the standard deduction limit in the old tax regime is Rs. 50,000.
Also, the new tax regime introduced in the Budget 2023 also provides a standard deduction of Rs. 50,000 to the salaried employees, starting from the financial year 2023-24.
The following allowances are exempted from taxable income under Section 10:
House Rent Allowance (HRA)
Allowance on Transportation
Children Education Allowance
Subsidy on Hostel Facility
Income Tax Exemption on Housing Loan
Details of Exemptions Provided under Section 10:
House Rent Allowance (HRA) is a type of allowance that is provided by employers to their employees to help them meet the cost of renting accommodation. HRA is exempt from income tax under Section 10(13A) of the Income Tax Act, 1961, subject to certain conditions.
Eligibility for HRA exemption
You must be a salaried employee.
You must have received HRA from your employer.
You must be actually paying rent for their accommodation.
The rented accommodation must be situated in India.
Amount of HRA exemption
Actual HRA received from the employer.
50% of the basic salary (for employees living in metro cities) or 40% of the basic salary (for employees living in non-metro cities).
Excess of actual rent paid over 10% of the basic salary.
Allowance on transportation, also known as transport allowance, is an allowance that is provided by employers to their employees to help them meet the cost of commuting between their residence and place of work. Transport allowance is exempt from income tax under Section 10(14)(ii) of the Income Tax Act, 1961, subject to a maximum limit of Rs. 1,600 per month.
Children Education Allowance (CEA) is an allowance that is provided by employers to their employees to help them meet the cost of educating their children. CEA is exempt from income tax under Section 10(14)(i) of the Income Tax Act, 1961, subject to a maximum limit of Rs. 100 per month per child, up to a maximum of two children.
A subsidy on a hostel facility is financial assistance provided by the government or an educational institution to students to help them meet the cost of staying in a hostel. Subsidy on hostel facilities is exempt from income tax under Section 10(14)(i) of the Income Tax Act, 1961, subject to certain conditions.
Other Allowances That Provide Income Tax Exemptions:
High Altitude Allowance
Special Compensatory Allowance
Counter Insurgency Allowance
Island Duty Allowance
Allowances applicable to North East
High Active Field Area Allowance
Compensatory Field Area Allowance
Tribal Allowance
Uniform allowance, etc.
The allowances mentioned above are tax-free, but make sure that you submit genuine proof of the expense.
You can claim income tax exemption on housing loans under two sections of the Income Tax Act 1961:
Section 24(b) for interest paid on housing loan
Section 80C for principal repayment of housing loan
Section 24(b)
Section 24(b) allows you to claim a deduction of up to Rs. 2 lakhs per annum for the interest paid on a housing loan. This deduction is available for both self-occupied and rented houses.
Section 80C
Section 80C allows salaried employees to claim a deduction of up to Rs. 1.5 lakhs per annum for the principal repayment of the housing loan. This deduction is also available for both self-occupied and rented houses.
The Income Tax Act, 1961 provides you with a number of income tax exemptions and deductions. These exemptions are granted to promote certain social or economic objectives, such as encouraging savings, investment, or charitable giving.
Some of the key sections for income tax exemption under the IT Act 1961 are as follows:
The government wishes to encourage you to invest in the best investment options or other payments if you choose the old tax regime. Subsequently, Section 80C of the Income Tax Act, 1961 provides for a deduction of up to Rs. 1.5 lakh per annum for certain investments and payments. The investments and payments that are eligible for deduction under Section 80C are as follows:
Unit Linked Insurance Plans (ULIP)
Child Plans
Capital Guarantee Plans
Employee Provident Fund (EPF)
Life Insurance Premium
Equity Linked Savings Scheme (ELSS)
Home Loan Principal Payment
Sukanya Samriddhi Yojana (SSY)
Tuition Fees for Children
Public Provident Fund (PPF)
National Saving Certificate (NSC)
Tax-Saving Fixed Deposit (Tax-Saver FD)
Section 80CCC of the Income Tax Act of India, 1961, is a subsection of Section 80C. It allows you to claim an additional deduction of up to Rs. 1.5 lakhs per annum from your total taxable income for contributions made to certain pension plans provided by life insurance companies.
The following pension plans are eligible for deduction under Section 80CCC:
Annuity plans and pension plans offered by life insurance companies
Pension plans offered by the Government of India or any State Government, like the National Pension Scheme (NPS)
This section of the IT Act allows you to claim a deduction of up to 10% of their salary (basic salary + DA) made by them towards the National Pension System (NPS). The deduction is available for both the employer’s contribution and the employee’s contribution in the old tax regime.
NOTE: The employee’s contribution to NPS is not eligible for income tax exemptions under Section 80CCD(1) in the new tax regime.
Section 80CCD(2) of the IT Act allows you to claim a deduction of up to 14% (in the case of central government employees) or 10% (in the case of any other employee) of their salary (basic salary + DA) made by their employer towards the National Pension System (NPS).
NOTE: The tax exemption under Section 80CCD(2) is also available with the new tax regime.
This is a tax-saving provision for first-time equity investors. It allows you to claim a deduction of up to 50% of the amount invested in equity shares or units of an equity-oriented fund, subject to a maximum deduction of Rs. 25,000 per annum.
The deductions under Chapter VIA are designed to reduce your taxable income and encourage you to save and invest.
The following are the deductions mentioned below in Chapter VIA of the Income Tax Act:
As per section 80D, the income tax exemption is applicable for those who have taken medical insurance for themselves, their family as well as their parents. Under Section 80D of the IT Act, one can claim a deduction on medical expenses. The limit of 80D exemption is Rs. 25,000 for the premium paid for family/self. In the case of senior citizens, tax exemption claims can be made up to Rs. 50,000. Moreover, health check-ups to the limit of Rs. 5,000 are also allowed and covered within the overall limit.
This section offers an additional income tax exemption of about Rs 50,000. Following are the conditions that you need to fulfil in order to avail the benefits of this section:
You must be the guardian of a differently abled individual. That person can be physically or mentally disabled.
You have to get a certificate from an authorised medical practitioner.
All the expenses arising from rehabilitation, training, treatment, and nursing.
Therefore, any amount deposited under any scheme taken for the differently abled dependent will be entitled to income tax exemption. Deductions of about Rs 1,00,000 can be claimed if the dependent is suffering from any severe disability.
This deduction is primarily for those who need to get treatment for serious diseases. As per this section, you can avail a deduction of Rs 40,000 against your income tax. The income tax deduction limit for senior citizens is Rs. 1,00,000. Also, the tax deduction is applicable to the expenditure made to treat a disease of self or someone dependent.
Similar to the home loan interest, income tax exemptions can also be claimed for interest on education loans.
An education loan can be taken from any financial institution.
The tax deduction can be availed for up to 7 years.
The advantage of this facility is that it can be utilised only in the case of higher education.
The benefit can be utilised only for the person or his spouse/children. Even the legal guardian of the scholar can reap the benefit of income tax exemption.
The donations made to the charitable organisation are entitled to income tax exemption under Section 80G of the Income Tax Act, 1961. The deductions vary depending on the nature of the receiving organisation, which means that it may be 100% or 50% of the donation made.
You are eligible for deductions under Section 80GG if you are unable to leverage the benefits of House Rent Allowance (HRA) from your company. The income tax exemption for the eligible taxpayers is the lower of,
Rent is less than 10% of salary
Rs. 5000 per month, i.e. Maximum Deduction is 60,000.
25% of the total income
Conditions to Avail Tax Exemption under Section 80GG:
The employee or his partner or minor child must not possess an accommodation in the city they are working in.
House Rent Allowance (HRA) must not be provided by the employee.
The employee must not possess any self-occupied residential location in any place.
Section 80GGA of the Income Tax Act of India, 1961, allows you to claim a deduction for donations made towards scientific research or rural development. The deduction is available for donations made to organisations that are approved by the Income Tax Department for this purpose.
This section of the IT Act provides you with a tax exemption for donations made to registered political parties or electoral trusts. The deduction is available for donations made through any mode other than cash.
Section 80QQB of the IT Act, 1961, allows you to claim a deduction for royalty income earned from the sale of books. The deduction is available for royalties earned on literary, artistic, and scientific books. However, royalties earned on textbooks, journals, and diaries are not eligible for deduction.
This section allows you to claim a deduction for royalty income received from patents. The deduction is available for royalties received from the use of patents in India or abroad.
If you earn Rs. 10,000 or above in interest income from your savings account, then you can claim a deduction of up to Rs. 10,000 from your taxable income.
If you are suffering from a disability, then you can claim a deduction for certain expenses related to your disability under Section 80U of the Income Tax Act of India, 1961. The maximum deduction that can be claimed under Section 80U is Rs. 75,000 per annum. The deduction is available for the following expenses:
Medical treatment, including the cost of medicines, hospital stays, and doctor’s fees.
Purchase of artificial limbs and appliances.
Education and training expenses.
Transportation expenses.
Other expenses incurred for the rehabilitation of the disabled person.
Income tax exemptions in India play a crucial role in reducing your tax burden and promoting economic growth. These exemptions are designed to incentivise savings, investment, and specific economic activities, benefiting both the taxpayer and the overall financial health of the nation.
Unit Linked Insurance Plans (ULIPs)
Public Provident Fund (PPF)
Agricultural income
House Rent Allowance (HRA)
Leave Travel Allowance (LTA)
Children’s education allowance
Medical allowance
The basic tax exemption limit for individual taxpayers is Rs. 3 lakhs for the new tax regime and Rs. 2.5 lakhs for the old tax regime
Unit Linked Insurance Plans (ULIPs)
House Rent Allowance (HRA)
Leave Travel Allowance (LTA)
Annuity Plans
Child Plans
Children’s education allowance
Invest in tax-saving instruments under Section 80C: ULIP, PPF, ELSS, Tax-Saver FD, NPS.
Claim deduction for house rent allowance (HRA)
Claim deduction for leave travel allowance (LTA)
Claim deduction for health insurance premiums
Claim deduction for medical expenses
Claim deduction for donations made to charity
Health insurance premiums paid for self, spouse, dependent children, and parents
Medical expenses incurred on preventive health check-ups
Medical expenses incurred on specified diseases, such as cancer, heart disease, and kidney disease
Medical expenses incurred on a dependent with a disability
Actual HRA received
50% of basic salary + DA for those living in metropolitan cities
40% of basic salary + DA for those living in other cities
Excess of rent paid annually over 10% of basic salary + DA
*All savings are provided by the insurer as per the IRDAI approved insurance plan.
*Tax benefit is subject to changes in tax laws. Standard T&C Apply
^The tax benefits under Section 80C allow a deduction of up to ₹1.5 lakhs from the taxable income per year and 10(10D) tax benefits are for investments made up to ₹2.5 Lakhs/ year for policies bought after 1 Feb 2021. Tax benefits and savings are subject to changes in tax laws.
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